Chapter 6 Homework

Midpoint formula is

How is the price elasticity of demand​ measured?
The price elasticity of demand is measured as

Perfectly inelastic demand

Perfectly elastic demand

Consider the polar case where the demand curve is perfectly elastic.
Use the line drawing tool to draw a perfectly elastic demand curve. Label this line​ 'D'.

Consider the two demand curves illustrated in the figure to the right.
Which of the two is relatively more elastic?

Elasticity

Compare the demand for sugar with demand for food.
The demand for sugar is likely

Compare the demand for pencils with demand for food.
The demand for pencils is likely

Determinants of the price elasticity of​ demand:

Suppose Wendy's hamburgers have many close substitutes available.
If​ so, then an increase in the price of Wendy's hamburgers will likely

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be −2.5 and the price elasticity of demand for all types of breakfast cereals to be −0.9.

The demand for Post Raisin Bran cereal is ___ and the demand for all types of breakfast cereals is ___.

Why might the demand for Post Raisin Bran cereal be more elastic than the demand for all types of breakfast​ cereals?

Post Raisin Bran cereal

Compare the demand for water with the demand for wine.

The demand for wine is likely

Consider the demand for cigarettes. Suppose the government increases the price of cigarettes by raising cigarette taxes.
How will this affect the demand for cigarettes over​ time?

If the price of cigarettes increases​, then the quantity of cigarettes demanded will

Consider the market for a new​ CD, where the price is initially ​$10.00 and 20 thousand copies are​ sold, as indicated in the figure to the right at point A.
The music company is considering lowering the price to ​$9.00​, at which price 24 thousand copies would be sold.

What is total revenue at the initial price​ (at point​ A)?

What would total revenue be at the lower price​ (at point​ B)?

Given this change in total​ revenue, is demand between these prices elastic or​ inelastic?

Total revenue

When demand is​ inelastic, price and total revenue move in the same​ direction:

When demand is​ elastic, price and total revenue move inversely​:

Consider the demand curve illustrated in the figure.

Is demand elastic or​ inelastic?

At what price is total revenue​ maximized?

Consider firms that introduce new​ products, such as DVDs in 2001. When firms introduce new​ products, how do they typically determine the price elasticity of demand for those​ products?

Firms with new products often

Market​ experiments

What information must economists have to estimate the price elasticity of​ demand?

To estimate the price elasticity of​ demand, economists need to know

Suppose the price of pepper increases by 25 percent​ and, as a​ result, the quantity of salt demanded​ (holding the price of salt ​constant) decreases by 4 percent.

In this​ example, pepper and salt are

Instead, suppose pepper and salt were substitutes.
If​ so, then the​ cross-price elasticity of demand between pepper and salt would be

An increase in the price of a substitute will lead to an increase in quantity​ demanded, so the​ cross-price elasticity of demand will be

Suppose income increases by 20 percent​ and, as a​ result, the quantity of a particular brand of automobile demanded​ (holding the price for this particular automobile​ constant) increases by 15 percent.

This particular brand of automobile is​ a(n) ___ good.

In another​ example, suppose market research shows that a particular brand of truck is a normal good and a necessity.
If​ so, then the income elasticity of demand for this truck is

Economist X. M. Gao and two colleagues have estimated that the​ cross-price elasticity of demand between beer and wine is 0.31.
If​ so, then beer and wine are ___.

Gao and colleagues have estimated that the​ cross-price elasticity of demand between beer and spirits is 0.15.
If the price of spirits increases by 10​ percent, then the quantity of beer demanded will ___ by __ percent.

In​ addition, Gao and colleagues have estimated the income elasticity of demand for beer to be −0.09.
If​ so, then beer is

Substitute:

Complement:

cross-price elasticity of demand

An increase in the price of a complement will lead to a decrease in the quantity​ demanded, so the​ cross-price elasticity of demand will be

A good is a ___ if the quantity demanded is very responsive to changes in​ income, so that a 10 percent increase in income results in more than a 10 percent increase in quantity demanded.

A good is a ___ if the quantity demanded is not very responsive to changes in​ income, so that a 10 percent increase in income results in less than a 10 percent increase in quantity demanded.

Between 1950 and​ 2006, the price of wheat fell dramatically from​ $15.81 per bushel to​ $3.40 per bushel.
Suppose between 1950 and​ 2006, the supply of wheat increased substantially due to increases in​ productivity, shifting the wheat supply curve to the right.

With this supply​ shift, the amount by which the price of wheat falls will be larger the more ___the demand for wheat.

In​ addition, assume that between 1950 and 2006 the income of the average American increased substantially and that wheat is a normal good.

With this increase in​ income,

What is the impact of an increase in worker productivity when demand is relatively more​ elastic?

Suppose a frost destroys the tomato crop in California but farmers see an increase in their revenues. Which of the following best explains​ this?

Which of the following is a primary determinant of the price elasticity of supply?
The price elasticity of supply is affected by

In​ particular, the supply curve for a particular product will be increasingly more elastic over a ___ period of time.

Over the past 30​ years, the price of oil has been relatively​ unstable, fluctuating between​ $11.00 and well over​ $100 per barrel.
Which of the following potentially contributes to​ oil-price instability?

Oil prices are relatively unstable because

Suppose a professional basketball game is to be played at a downtown urban ​arena, which increases demand for parking on the night of the game.

If the urban area has limited ability to create additional parking during periods of peak​ demand, then

Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of the supply of​ oil?